Final Results

2016 FULL YEAR RESULTS ANNOUNCEMENT

28 February 2017

Exova Group plc ("Exova"), a leading international provider of technically demanding testing and advisory services, announces its results for the year ended 31 December 2016.

Strong revenue and earnings growth

· Revenue up 10.8% at actual rates; 2.4% at constant currency

o (0.2)% organic1 growth at constant currency2

o 5.5% organic growth excluding Oil & Gas and Industrials 

o 6.2% from acquisitions, partially offset by (3.6)% from disposals

· Strong sector performance in Fire, Building Products & Certification, Aerospace, Health Sciences and Infrastructure & Environment

o Oil & Gas and Industrials continued to weaken and forward visibility remains poor

· Three acquisitions adding to capability, Admaterials in Singapore, plus Jones Environmental Forensics and Insight NDT in the UK

· Further reshaping of the Group with a move to a divisional organisational structure, plus two significant non-core business disposals, UK and Ireland Food, Water and Pharmaceuticals and Eastern Canada Environmental

· Proposed final dividend of 2.35p per share (2015: 2.2p), making a full year dividend of 3.4p per share (2015: 3.2p)

Notes:

1) Organic revenue growth at constant currency represents revenue growth at constant currency for each year excluding the growth attributable to acquisitions until the acquisition has been owned for a 12 month period and excluding the revenue attributable to disposals in the year of disposal and the preceding year.

2) Constant currency growth figures are provided in order to remove the impact of currency translation. We calculate growth at constant rates by translating the current and prior period revenue at the same exchange rates.

3) Adjusted results are stated before separately disclosed items.

Ian El-Mokadem, Chief Executive Officer, commented:

"I am pleased to report another satisfactory set of results in line with expectations, demonstrating the strength of our diversified portfolio and our ability to respond to changing market conditions. Overall growth was strong with broad based organic growth across the portfolio, with the exception of our Oil & Gas and Industrials sector.

The portfolio has been strengthened by the recent acquisitions and disposals, and with extensive cost actions taken to mitigate the poor trading conditions in oil & gas, we continue to make good progress towards our medium-term objectives."

Outlook

The Board expects modest organic revenue growth at constant currency in 2017. This will be driven by Exova's diversified exposure and good growth in most sectors, moderated by continuing pressure in oil & gas, and a lower point in the project cycle of our engines testing business. Organic growth is expected to be weighted towards the second-half, partly as a result of more favourable like-for-like comparisons. Our acquisitions programme should continue to contribute to overall revenue growth. We expect that recent actions we have taken to reduce cost will offset general pressure on group margins in the current financial year.

Our medium-term revenue expectation remains mid-single digit organic growth, and continued expansion through acquisitions.

Contacts

Peter Ogden / Andy Jones

Powerscourt Group

Tel. Direct +44 (0)20 7549 0997 / +44 (0)7793 858 211

exova@powerscourt-group.com 

Analyst briefing and conference call

There will be an analyst briefing and conference call today at 8.30am GMT, held at Goldman Sachs International, River Court, 120 Fleet Street, London, EC4A 2BE. A copy of the presentation is available on the website.

Corporate website: www.exova.com

Exova

Exova is one of the world's leading laboratory-based testing groups, trusted by organisations to test and advise on the safety, quality and performance of their products and operations. Headquartered in Edinburgh, UK, Exova operates 135 laboratories and offices in 33 countries and employs around 4,200 people throughout Europe, the Americas, the Middle East, Asia/Asia Pacific and Africa.

Exova's capabilities help to extend asset life, bring predictability to applications, and shorten the time to market for customers' products, processes and materials. With over 90 years' experience, Exova specialises in testing across a number of key sectors ranging from Aerospace to Fire & Building Products; Oil & Gas and Industrials; Infrastructure & Environment; Transportation; and Health Sciences.

This Trading Update release contains forward-looking statements that involve substantial risks and uncertainties and actual results and developments may differ materially from those expressed or implied by these statements by a variety of factors. These forward-looking statements speak only as at the date of this press release. In addition, all projections, valuations and statistical analyses provided in this document may be based on unaudited pro-forma financial information, subjective assessments and assumptions. They may use alternative methodologies that produce different results and should not be relied upon as an accurate prediction of future performance.

Exova Group plc is registered in England (registration number 08907086). Its legal entity identifier ('LEI') number is 213800BFE317FGSYMZ19.

FULL YEAR REPORT 2016

BUSINESS REVIEW

The principal activities of the Group are specialist testing and advisory services and the key markets served are Aerospace; Oil & Gas and Industrials; Fire, Building Products and Certification; Transportation; Calibration and Infrastructure, Health and Environment.

Exova operates primarily in the Testing segment of the Testing, Inspection and Certification ("TIC") sector. It has a growing Certification business, as well as providing Inspection services in a number of niche markets and geographies.

The business comprises 135 permanent facilities in 33 countries and employs around 4,200 people.

Overview of performance

1) Organic revenue growth at constant currency represents revenue growth at constant currency for each year excluding the growth attributable to acquisitions until the acquisition has been owned for a 12 month period and excluding the revenue attributable to disposals in the year of disposals and the preceding year.

2) Constant currency growth figures are provided in order to remove the impact of currency translation. We calculate growth at constant rates by translating the current prior period revenue at the same exchange rates.

3) Adjusted items are stated before separately disclosed items.

4) The cash conversion ratio is calculated by dividing free cash flow by adjusted EBITDA. Free cash flow is defined as adjusted EBITDA less movement in net working capital (excluding the effect of the IPO related cost accrual), less capital expenditure net of disposals.

Revenue

Notes:

5) Growth percentages are calculated on constant currency revenue

Revenue for the year was £328.6m which represented organic growth at constant currency of (0.2)%.

Acquisitions contributed 6.2% of growth, in part offset by three disposals which resulted in a reduction of 3.6%. The Group reports in sterling which weakened during the course of the year over the currencies in the territories in which the Group operates. This resulted in a positive translation effect of 8.4%.

Adjusted EBITA margin

Adjusted EBITA margin decreased by 50bps from 15.8% to 15.3%. This reflects the continuing challenges within the Oil & Gas and Industrials sector which negatively affected margins, offsetting the improvements elsewhere, including the positive contribution from acquisitions and the favourable translation impact.

Statutory operating profit

Statutory operating profit of £43.5m grew 47.5% largely due to business growth from acquisitions and a gain on disposal of businesses. The prior year also included a higher amortisation of intangibles charge, as the Bodycote customer relationships are now amortised in full.

Separately disclosed items

The Group presents, as separately disclosed items on the face of the group income statement, those material items of income and expense which, because of their nature, merit separate presentation to allow users to understand better the elements of financial performance in the year. The Group believes this presentation facilitates a comparison with prior periods and a better assessment of trends in financial performance.

Gain on disposal of businesses

The Group made three business disposals in 2016 with two being significant, as follows:

The sale of the UK and Ireland Food, Water and Pharmaceuticals business to international life sciences company, Eurofins Scientific, completed 1 July 2016, for a cash consideration of £18.0m including a selling price adjustment of £0.1m. The cash consideration was net of certain working capital balances retained and liabilities transferred (gross consideration £20m).The net gain was £5.3m.

The sale of the Environmental East business in Canada, also to international life sciences company, Eurofins Scientific, completed on 5 December 2016, for a cash consideration of £7.5m, subject to a further selling price adjustment. The cash consideration was net of certain working capital balances retained and liabilities transferred (gross consideration £9.1m).The net gain was £0.6m.

The sale of a division of WFR Gent NV completed 24 March 2016 for a cash consideration of £0.2m. The net gain was £0.2m.

Summarised financial information relating to the sale of the businesses is shown in the table below:

Amortisation of intangible assets

Amortisation of intangible assets for 2016 was £3.9m, a decrease of £5.0m from £8.9m in 2015. This decrease was due to customer relationships acquired from Bodycote now fully amortised partly offset by customer relationship amortisation relating to acquisitions made over the last few years.

Restructuring costs

Oil & gas restructure

To mitigate the poor trading conditions in oil & gas, we have undertaken further cost actions globally to right size the business. This restructuring programme totalled £3.3m and included onerous lease provisions of £1.8m, staff redundancies of £1.2m and other property related costs of £0.3m.

Portfolio realignment and organisational restructure

Following the completion of acquisitions earlier in 2016 coupled with the UK and Ireland Food, Water and Pharmaceuticals disposal, we realigned our sectors and organisational structure to reflect the shape of the Group more appropriately going forward. The cost in relation to this was £2.0m and comprised mainly staff redundancies.

Other

Having undertaken a strategic review of our laboratory footprint within our Aerospace sector and Products division, we restructured certain laboratories which resulted in costs of £0.6m, largely relating to staff redundancies.

Impairment of property, plant and equipmentDue to the poor oil & gas trading conditions, we undertook a review of property, plant and equipment in those laboratories and recognised an impairment of property, plant and equipment for the amount of £1.5m.

Acquisition and integration costs

Acquisition costs incurred in relation to the purchase of Admaterials Technologies Private Limited was £0.1m, Jones Environmental Forensics Limited £0.3m and Insight NDT Limited £0.2m. Acquisition costs included stamp duty, due diligence fees including professional advisors fees in relation to tax, legal, property and insurance advice. Integration costs amounting to £0.5m in total for these businesses include project management, travel and rebranding costs. Integration costs for businesses acquired towards the end of 2015 amounted to £0.1m and costs in relation to active and failed projects amount to £1.0m. Contingent consideration of £0.6m in relation to the acquisition of Metallurgical Services Private Limited was reversed in the current year, as the target was not met.

Income tax credit

Included in the income tax credit, is £0.3m (2015: £2.0m) related to the amortisation of the deferred tax liability in respect of customer relationships. An income tax debit of £1.6m (2015: £1.8m) relates to restructuring, amortisation and integration costs; and an income tax credit of £1.5m relates to the tax charge on the gain on disposal of businesses.

Net cash interest payable in the year increased from £5.1m to £5.5m. The increase relates to the term loans due to the weakening of sterling against the currencies that the bank loans are denominated.

Income tax

The total tax charge for corporate income tax and deferred tax is £7.9m (2015: £4.7m).

The Group is in a tax paying position in a number of overseas jurisdictions, in which it operates, with a total overseas income tax charge of £4.9m (2015: £4.2m). UK taxable profits were partially offset by UK losses which resulted in a UK tax charge of £1.2m (2015: £0.5).

Earnings per share

Basic earnings per share for the twelve months ended 31 December 2016 was 10.5p (2015: 6.8p).

Basic adjusted earnings per share for the twelve months ended 31 December 2016 was 13.1p (2015: 12.2p). This measure calculates earnings per share before separately disclosed items.

Dividend

The Board is recommending a final dividend of 2.35p per share (2015: 2.2p per share). This will absorb an estimated £6m of shareholders' funds. The total dividend for 2016 will therefore be 3.4p per share representing an increase of 6.3% (2015: 3.2p). The dividend will be paid on 9 June 2017 to shareholders on the register at the close of business on 26 May 2017.

Acquisitions

During 2016 the Group completed three acquisitions.

On 15 February 2016, the Group acquired 70% of the share capital in Admaterials Technologies Private Limited (Admaterials) for a cash consideration of £5.4m (£4.8m net of cash acquired). The consideration to acquire Admaterials includes a put and call option to purchase the remaining shareholding three years after the acquisition based on the same earnings multiple as the original offer. The acquisition has been accounted for as though 100% of the share capital had been acquired, with a liability recognised as contingent consideration in relation to the put option. The fair value of the call option is immaterial. Acquisition costs incurred in the year in respect of Admaterials amounted to £0.1m. This Singapore based business provides testing in the construction sector, as well as chemical, environmental and mechanical testing and certification services. Founded in 2008, Admaterials is one of the leading construction testing businesses in Singapore, as well as providing chemical, environmental and mechanical testing to a range of customers in the private and government sectors. The business has annual revenues in the region of £3.5m and a team of more than 70 specialists.

On 1 July 2016, the Group acquired 100% of the share capital of Jones Environmental Forensics Limited (Jones) for a purchase consideration of £15.5m (£16.1m net of finance lease settled and cash acquired). This includes deferred consideration of £1.0m and an amount of up to £1.6m is contingent upon future profitability of the business. The purchase consideration is subject to further purchase price adjustments. Acquisition costs incurred in the year in respect of Jones amounted to £0.3m. Jones is a North Wales-based independent environmental laboratory business and the UK's market leader in contaminated land analysis and a specialist in environmental forensics, with an excellent reputation for both quality and service. Jones has built a strong reputation as the laboratory of choice for contaminated soil and water analysis, primarily selling its services to leading global environmental consultants, with the ultimate end customers covering a variety of market segments, many of which Exova has an existing presence with. The business has a team of over 150 specialists and has annual revenues of £8.0m.

On 2 December 2016, the Group acquired 100% of the share capital of Insight NDT Limited (Insight), a South Yorkshire-based non-destructive testing (NDT) and radiographic inspection business for a purchase consideration of £7.6m (£7.1m net of cash acquired). The purchase consideration includes deferred consideration of £0.1m and an amount of up to £1.5m is contingent upon future profitability of the business. Acquisition costs incurred in the year in respect of Insight amounted to £0.2m. Insight is at the forefront of the NDT market in the UK, providing it's specialist services to the industrial sector since 1997. Insight's reputation is built on consistently providing high quality, high capacity and fast turnaround radiographic inspection services for manufacturers of specialised castings and forgings within the industrials market, as well as providing testing for the nuclear, medical, rail and oil & gas sectors. The business has an experienced team of 20 specialists and achieved revenues of around £2m in 2015.

1) Adjusted EBITA is operating profit from continuing operations before separately disclosed items and depreciation. Refer note 1 on page 18 for a reconciliation of profit before tax to Adjusted EBITA, Adjusted EBITDA and free cash flow.

2) Purchase of property, plant and equipment and computer software, net of disposals.

3) Excludes effect of accrual of IPO related costs.

4) Free cash flow divided by adjusted EBITDA.

5) Comprising restructuring, acquisition and integration charges, IPO cash costs and financing items

Free cash flow increased by £11.7m as a result of increased EBITDA and improved working capital management. This had a positive impact on cash conversion at 72% (2015: 59%).

Net capital expenditure includes proceeds on disposals of £0.1m. Gross capital expenditure of £18.3m represents 5.6% of revenue(2015: 5.9 %).

Net debt (excluding debt issue costs)

At 31 December 2016, our term loans comprised £193.6m of non-amortising borrowings denominated in sterling, euro, Canadian dollars, US dollars and Swedish krona. The increase in the term loan is due to the weakening of the sterling against the major currencies that the loans are denominated in. There are no repayments scheduled on our term loans until 2019.

The amounts drawn down on the revolving credit facility are denominated in sterling. In addition, a £82.0m revolving credit facility was undrawn at 31 December 2016.

The net debt to Adjusted EBITDA ratio was 2.3x at 31 December 2016 (2015: 2.6x). Based on the definition in the bank covenant, net debt to Adjusted EBITDA ratio is 2.1x (2015: 2.4x).

Presentation of results

Constant currency growth figures are provided in order to remove the impact of currency translation. We calculate growth at constant rates by translating the current and prior period revenue at the same exchange rates.

Organic growth at constant currency represents revenue growth at constant currency excluding the growth attributable to acquisitions until the acquisition has been owned for a 12 month period and excluding the revenue attributable to disposals in the year of disposal and the preceding year.

Adjusted items are stated before separately disclosed items. The Group's operations are defined as laboratory based testing, certification and advisory services. For a user to understand the Group's operations, we aggregated and disclosed separately those material items which are not in the ordinary course of laboratory based testing, certification and advisory services. We define the Group's profit from these operations as Adjusted EBITA, which is operating profit from continuing operations before separately disclosed items, interest, and taxation. We believe Adjusted EBITA is the most significant indicator of operating performance for the Group as it measures cost efficiency in relation to overall activity levels and allows a better understanding of the underlying or long term profitability of the group. Adjusted EBITDA is Adjusted EBITA before depreciation.

The Group presents, as separately disclosed items on the face of the income statement, those items of income and expense which, because of their nature, merit separate presentation to allow users to understand better the elements of financial performance in the period to facilitate a comparison with prior periods and a better assessment of trends in financial performance.

Free cash flow is used in the calculation of the Group's cash conversion rate. This provides a measure of the Group's ability to manage operational cash flow generation which we believe is useful to users of the financial statements as it represents cash flows that could be used for repayment of debt or to fund our strategic initiatives, including acquisitions, if any. Free cash flow is defined as adjusted EBITDA less movement in net working capital (excluding the effect of the IPO related cost accrual), less capital expenditure net of disposals.

Foreign exchange

Exchange rates for the most significant currencies used by the Group during the year were:

OPERATING PERFORMANCE

Revenue

Adjusted EBITA

Divisional Performance

Industries

The Division reported a mixed performance with strong growth in Aerospace and some encouraging signs in Industrials in the second half being offset by the continued weakness in the oil & gas market, leading to an overall contraction in organic revenues.

Aerospace

The Aerospace sector delivered strong organic growth, driven by high rates of production release testing, as a result of improved aircraft build rates, notably in the Americas. Testing revenues associated with research and development were driven primarily by developments in aircraft engine materials and more latterly by emergent technologies such as additive layer manufacturing, which is being increasingly adopted by Aerospace OEMs. Following a flat 2015 our Swedish Aerospace business returned to good organic growth in 2016, driven by strong demand from the Swedish aerospace and defence sectors, with a particular focus on NDT services.

We continued to invest in our Aerospace testing facilities across the world, with new test frames installed in the USA, UK and Canada, as well as consolidation of our European creep and stress rupture test capability in Plzen, Czech Republic. Our 2016 investments in fatigue capacity and modern testing technologies look set to position the sector for continued organic growth in 2017.

Oil & Gas and Industrials

In Europe continued impact of low oil prices led to contraction and price pressure in the oil & gas testing market. Although some 2015 projects completed successfully in the first part of the year, we experienced lower levels of new approved projects from Q2 2016 onwards. As part of the focus on diversification, we successfully secured a number of contracts with non-oil & gas customers such as Tata Steel and Sellafield in the UK; and with the acquisition of Insight NDT Limited we gained greater access to opportunities in the industrials segment.

As in Europe, the US oil & gas market continued to experience strong headwinds, resulting in revenue decline versus 2015, as major Gulf of Mexico research and development and capital projects were delayed and/or cancelled. During the year we took restructuring actions to mitigate volume and price pressures in line with the market. The Americas industrials segment had an encouraging end to the year. Despite some softening in the US primary and secondary steel markets, we saw improvement in the second half and overall growth in the segment, helped by a strong performance in Canada due to demand from the rail and automotive sectors. In 2017, further sales focus on industrials will help to reduce our exposure to oil & gas market conditions and allow us to utilise laboratory capacity and expertise as fully as possible.

Our Western Canada oil & gas business managed the downturn by diversifying its client base to include more infrastructure and agriculture. We continued to benefit from providing excellent service and using targeted sales campaigns with the final quarter seeing some possible green shoots of recovery.

We also faced very strong headwinds in our Asia Pacific oil & gas business, with a significant reduction in subsea project activity. We have closed our Malaysia oil & gas laboratory and reduced headcount in Singapore, retaining key capability co-located with the Admaterials laboratory. Our India facility held up well, with good organic growth despite a heavy reliance on oil & gas customers; we successfully extended our range of technically demanding services and saw good growth from the new corrosion facility.

Products

The Products Division showed growth in all sectors apart from Transportation, with particularly strong performance in Fire, Building Products and Certification,

Fire, Building Products and Certification

Ongoing European standardisation and the introduction of new standards in many parts of the world have continued to create a positive market for fire testing. In Europe we saw continued focus on the harmonisation of standards in the areas of doors and door hardware, as well as more general penetration seals and joints. In Australia we saw the introduction of new standards and guidelines in the area of façade fire protection and façade testing, which in turn drove growth in the Exova Warringtonfire businesses.

Overall the market for fire engineering was positive but some concerns arising from Brexit were apparent. In the Middle East, projects were not as abundant as in 2015, while North America had a successful year through the introduction of new tests and renewed sales effort in fire testing. The sector was further supported by an increase in inspection and certification services, and also benefitted from the final integration of BM TRADA into Exova.

Transportation

Our Warren and Troy laboratories both delivered strong performances, with the former upgrading its approach to interiors testing and adding several pieces of new equipment to drive customer growth and deeper relationships. As in 2015, the Troy laboratory executed some major structures and durability projects for key clients contributing to good growth throughout 2016. Nevertheless, in line with expectations, total revenue for Transportation was slightly behind in 2016, as a result of lower volumes of engine testing compared with those seen in 2015. There is a healthy opportunity pipeline for 2017 across both our Troy and Warren laboratories.

Calibration

The calibration business delivered modest organic growth, with increases in demand from many large clients partially offset by one major client deciding to move their operations away from Scandinavia. Life Sciences and energy clients were a more significant part of the client mix during 2016, a trend that we expect to continue in 2017. We increased the scope of calibration services that we offer and we also initiated the coming together of our operations in the Czech Republic and Germany to drive operating efficiencies.

Infrastructure, Health and Environment

The Infrastructure, Health and Environment Division had a very strong year, with growth in all three sectors leading to a 9.3% improvement at constant currency. Revenues were also boosted by two acquisitions in the Division, each of which gave us strong positions in new segments.

Infrastructure

Our Middle East business enjoyed strong growth in the year, overcoming difficult economic conditions due to the fall in energy prices. Our laboratories in Saudi Arabia, the UAE and Oman improved their market share delivering impressive year-on-year growth. In Saudi Arabia, materials and environmental testing were strong, with services being provided to support further development of the Kingdom's master gas system. The region also benefited from the full year impact of the metro projects in Riyadh and Doha, which offset a slowdown in infrastructure projects in Abu Dhabi.

We were also awarded a sizeable contract with a government entity in Qatar to provide full production-to-sale QA/QC testing and inspection services for aggregate materials. The project required the establishment of three third party-accredited large site laboratories in two different countries. We expect activity on this project to be significantly lower in 2017. In February 2016 we acquired Admaterials Technologies Private Limited, a multi-disciplinary laboratory based in Singapore, specialising in infrastructure materials testing and environmental chemistry. Integration has been completed successfully and the laboratory has continued to win some excellent projects, growing ahead of plan.

Health Sciences

Our Americas pharmaceuticals business demonstrated good growth, driven by complex development projects, increased manufacturing support and biotherapeutics testing for both Canadian and US pharmaceuticals and medical device companies. Several long-term agreements with pharmaceuticals companies helped to ensure a solid base of continuous testing projects. Investment in IT systems continues to help us provide an improved customer service experience. Our food laboratory in Portland, Oregon had a very strong year with the growth of several key clients in a very competitive market segment.

Environment

The UK and Ireland environment business experienced very strong overall growth in 2016. Underpinned by good organic growth in our market-leading stack emissions business, our asbestos testing and occupational hygiene businesses, we acquired the UK's leading contaminated land laboratory, Jones Environmental in July. The integration of this business and that of the emissions testing division of REC (acquired at the very end of 2015) were both completed in line with agreed plans.

Outlook

The Board expects modest organic revenue growth at constant currency in 2017. This will be driven by Exova's diversified exposure and good growth in most sectors, moderated by continuing pressure in oil & gas, and a lower point in the project cycle of our engines testing business. Organic growth is expected to be weighted towards the second-half, partly as a result of more favourable like-for-like comparisons. Our acquisitions programme should continue to contribute to overall revenue growth. We expect that recent actions we have taken to reduce cost will offset general pressure on group margins in the current financial year.

Our medium-term revenue expectation remains mid-single digit organic growth, and continued expansion through acquisitions.

GROUP INCOME STATEMENT

For the year ended 31 December 2016

* Earnings per share on adjusted results are disclosed in Note 5.

GROUP STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2016

GROUP BALANCE SHEET

As at 31 December 2016

GROUP STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2016

GROUP STATEMENT OF CASH FLOWS

For the year ended 31 December 2016

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2016

New standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2015.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but not yet effective. There are no standards or interpretations effective for the first time in the financial period with a significant impact on the Group's consolidated results or financial position.

The European Markets and Securities Authority has issued "Guidelines on Alternative Performance Measures" which are effective from 3 July 2016 and which have been followed in explaining the use of non-GAAP measures in these financial statements.

Non-GAAP Measures

The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006. In measuring our operating performance, the financial measures used include those which have been derived from our reported results and cash flows in order to eliminate factors which distort period-on-period comparisons. These are considered non-GAAP financial measures. We believe this information, along with comparable GAAP measurements, is useful for users of the financial statements in providing a basis for measuring our operational performance. Below we set out our definitions of non-GAAP measures and provide reconciliations to relevant GAAP measures.

Adjusted EBITA and Adjusted EBITDA 

The Group's operations are defined as laboratory based testing, certification and advisory services. For a user to understand the Group's operations, we aggregated and disclosed separately those material items which are not in the ordinary course of laboratory based testing, certification and advisory services.

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2016

We define the Group's profit from these operations as Adjusted EBITA, which is operating profit from continuing operations before separately disclosed items, interest, and taxation.

We believe Adjusted EBITA is the most significant indicator of operating performance for the Group as it measures cost efficiency in relation to overall activity levels and allows a better understanding of the underlying or long term profitability of the Group. Adjusted EBITDA is Adjusted EBITA before depreciation.

Free cash flow

Free cash flow is used in the calculation of the Group's cash conversion rate. This provides a measure of the Group's ability to manage operational cash flow generation which we believe is useful to users of the financial statements as it represents cash flows that could be used for repayment of debt or to fund our strategic initiatives, including acquisitions, if any.

Free cash flow is defined as Adjusted EBITDA less movement in net working capital (excluding the effect of the IPO related cost accrual), less capital expenditure net of disposals.

A reconciliation of profit before tax to Adjusted EBITA, Adjusted EBITDA and free cash flow is presented below:

2. SEGMENTAL REPORTING

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2016

3. SEPARATELY DISCLOSED ITEMS

The Group presents, as separately disclosed items on the face of the group income statement, those items of income and expense which, because of their nature, merit separate presentation to allow users to understand better the elements of financial performance in the year to facilitate a comparison with prior years and a better assessment of trends in financial performance.

A full description of these costs is included in the announcement on pages 4 and 5.

Included in the income tax credit is £0.3m (2015: £2.0m) related to the amortisation of the deferred tax liability in respect of customer relationships. An income tax debit of £1.6m (2015: £1.8m) relates to restructuring, amortisation and integration costs; and an income tax credit of £1.5m relates to the tax charge on the gain on disposal of businesses.

4. NET FINANCE COSTS

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2016

5. EARNINGS PER SHARE

The Board is recommending a final dividend of 2.35p per share (2015: 2.2p per share). This will absorb an estimated £6m of shareholders' funds. The total dividend for the year will therefore be 3.4p per share representing an increase of 6.3% (2015: 3.2p).The dividend will be paid on 9 June 2017 to shareholders on the register at the close of business on 26 May 2017.

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2016

7. PROPERTY, PLANT AND EQUIPMENT

Acquisitions and disposals

During the year ended 31 December 2016, the Group capitalised assets with a cost of £23.3m including £5.9m from business combinations (note 8) (2015: £17.5m including £1.8m from business combinations).

Assets with a carrying value of £5.9m were disposed of during the year ended 31 December 2016 (2015: £0.1m).

The positive impact of foreign exchange on the total carrying amount of property, plant and equipment in the year ended 31 December 2016 was £9.2m (2015: £1.0m negative impact).

The net book value of property, plant and equipment was as follows:

Property, plant and equipment include £0.3m (2015: £0.4m) of assets held under finance leases.

Capital commitmentsAt 31 December 2016 the Group had commitments to purchase property, plant and equipment for £1.4m (2015: £3.4m).

8. BUSINESS COMBINATIONS